Organizational progress is one of the major goals of any institution set up for business. The management of financial resources and proper decision making is one of the most efficient ways through which such an enterprise can obtain progress. Every organization aims to have increased profit margins and improve the quality of their company through continued sustainable practice. The proper management of the financial aspect of the company can ensure that these goals are met. This paper is a review of financial management practices including sources of finance to determine proper practice in the field. A number of case studies are analyzed for the adequate answering of these questions.
Financial Planning - Sources of Finance
There are different types of finance available for businesses depending on the needs of the organization at the time. Equity or debt financing is available because of the variety of needs in a company depending on its size and finance structure. In the case of financial needs in the company, there can be internal or external forms of finance. Different methods are available for financing, namely short-term and long-term finance sources.
Short-term financing have three main forms of financing, namely overdrafts, factoring and trade credits (Douglas, 2010). Overdrafts are financial provisions where the firm can take out more money from the bank than they have as a form of short-term finance in expectation of incomes to the company. The intention of such overdrafts is that the company should be able to pay back shortly – thus the label short-term finance. Trade credits are forms of short-term finance where the company will take out goods on credit in view of gaining an advantage to supply and pay back the debt (Hill, 2013). The supplier will have to wait for a few days before payment for the goods delivered is processed. Factoring, on the other hand, is writing an invoice to the company in arrears of payment to request full payment of all money due as opposed to waiting for one month to process payments for such large transactions. For this particular case, the company expecting payment can factor in such payments instead of waiting the full 28 days for the processing of payment.
Long-term finance plans are also available to the institution in the form of leases, grants and stakeholder contributions. An example of such a lease is a debenture. In this instance, the company obtains a loan which has a very long repayment period. Encumbrances from the loan are normally calculated and deducted from revenues before taxes are paid. For example, if a university should obtain a debenture for the refurbishment of its facilities, these repayments will be deducted from revenues before taxes are paid to the government. Other forms of leases include the long-term payment of assets that the company is making use of including lands, vehicles, and other forms of chattel owned by the organization. Grants are finance sources offered to non-governmental organizations and other forms of government agencies for dealing with social ills such as unemployment, crime and so on. Most grants are normally not repaid. They are given as financial boosts to such organizations for the improvement of service (IASB, 2007).
Monetary policies are a commonplace phrase in the economic environment. It denies the actions that particular regions take in a bid to control the flow of money in that region and avoid issues such as inflation to promote economic growth (Deal Flow, 2014). Planning an organization financially is key to the positive risk avoidance for institutions for adversities that may face it. Rising economic crises that are global in nature show the need for the company to organize itself financially in different ways in order to avoid the possibilities of liquidation or shutting down operations (BBC UK, 2014). Cash management, prioritization and business planning for the long term are some factors necessitating planning for enterprises and organizations. In the face of prevailing financial trends, there is also a need for planning as an enterprise anticipates diverse economic situations that may rock the financial sector of the company. Financial planning finally ensures that there can be progress measurement in terms of revenues and other forms of income that the company obtains.
As such, it is important to consider that the different kinds of financing methods are attached with different costs and liabilities. For example, the cost of obtaining finance from equity is often higher than that of obtaining finance from debts. This means that loans and debentures are always better placed for both risk and repayment as opposed to short-term finance methods. This could be because of a range of factors including the fact that the longer repayment periods offer diversified risk portfolios and evenly-spread financial risk to the lender. Furthermore, long-term debts are mostly used for value-adding practices to the company including the acquisition of asserts (Boundless, 2013). On the other hand, short-term financing methods are often used for the purpose of running daily operations, and may not yield as much returns on investment as would long-term initiatives. Equity is a deductible expense. As such, equity financing may increase hurdle rates in the course of creating offsets for reduction of cash flows. This means that there is higher risk attached to the engagement of equity. Institutions receive loans (otherwise known as debentures) at an interest rate. This is the cost associated with such long term financing methods. Short-term methods, however, may not have costs attached to them as financiers will be willing to remove additional costs so long as the repayment date is observed. However, a company that takes on more aggressive pursuits in their quick business may overload on short-term finances and increase company risk when such an enterprise engages in business. In addition, late payments made for short-term finance cause miscellaneous costs that the company is taking on to increase.
Cash Flow Difference
Cumulative Difference (Discounted)
The following shows the budget for the Heath Limited. This shows that within the first month and at the current prices being given by the company, there is going to be a return on the investment that has been set aside in this project. Information from the sale show that there is a good investment for this particular sale. The break-even point will be at the second month where the business is expected to now become profitable after the investment that the company had made comes back to them. The Heath is thus a deficit as it shows very high performance in a very short period of time. It is thus necessary that the company deals with the deficit in the most appropriate way. This is under the consideration that the company is supplying goods that are moving very fast and may face higher demand than supply in future. Ordering items on better estimates could be a way of dealing with the possibility of a deficit. This ensures that the number of items being delivered is equal to the need that is present with the population at the time. The company can thus ensure that there are higher sales to meet the customer demands for the products being supplied.
Furthermore, a diversified range of products and services can help the company remain on top of the supply chain efficiency. This is through ensuring that there can be a wide variety of the goods that are most widely bought. This means that when one brand of goods is out of stock, the alternative can be used to continue conducting business for the sake of checking the supply chain.
Financial planning presents an integral part of management for any enterprise. As seen above, financial planning can be used to determine the kind of approach a business can use in the sales of its products. Furthermore, the different types of financial props that are available have been found for their different kinds of advantages and disadvantages in the course of business practice. Organizations should thus find the necessity to implement financial planning for the sake of catering for their sustainable futures in the marketplace.
BBC UK. (2014). Sources of Finance. Retrieved March 14, 2016, from BBC UK: http://www.bbc.co.uk/schools/gcsebitesize/business/finance/sourcesoffinancerev2.shtml
Boundless. (2013). Long-term Vs Short-term Financing. Retrieved March 14, 2016, from Boundless.com: www.boundless.com/finance/textbooks/boundless-finance-textbook/capital-budgeting-II/introduction-to-capital-budgeting-91/long-term-vs-short-term-financing-395-8296/
Deal Flow. (2014). Debt Financing: short-term debts financing. Retrieved March 14, 2016, from dealflow.org: www.dealflow.org.sg/cms/services/financing_for_smes_debt_financing.aspx
Douglas, K. (2010). Taking Action to Close the Nursing-Finance Gap: Learning from Success. Retrieved February 12, 2016, from Nursing Economics: https://www.nursingeconomics.net/necfiles/staffingUnleashed/su_JA10.pdf
Hill, B. (2013). The Importance of a Financial Plan for a Small Business. Retrieved March 14, 2016, from Small Business Chron: www.smallbusiness.chron.com/importnace-financial-plan-small-business-4713.html
IASB. (2007). Conceptual Framework for Financial Reporting 2010. Retrieved March 14, 2016, from IASB: http://www.iasplus.com/en/standards/other/framework.
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